Pinnacle Airlines files for bankruptcy in US

Pinnacle Airlines Corp, parent of Pinnacle Airlines and Colgan Air, filed for bankruptcy protection late on Sunday, the latest victim of high fuel prices and dampened travel demand.

Memphis, Tennessee-based Pinnacle PNCL.O operates as various regional airlines - most notably Delta Connection - for bigger-name partners including Delta Air Lines (DAL.N), United Airlines (UAL.N) and US Airways LCC.N.

Pinnacle said it would rework contracts with Delta and end flying for United and US Airways. The company also wants to cut its labor and operating costs.

The U.S. airline industry has been battered by soaring fuel costs and economic weakness that has drained travel demand. Regional carriers have felt the squeeze as their major partners cut back on flights to smaller cities.

"Quite simply, our current business model is not sustainable, as increasing operating expenses, liquidity constraints, business integration delays and difficulties associated with combining our operations have hindered our ability to maximize our growth potential," said Sean Menke, Pinnacle's president and chief executive, in a statement.

Pinnacle, which has 8,000 employees, flies as Delta Connection, United Express and US Airways Express. It operates more than 1,540 daily flights to 188 cities and towns in the United States, Canada, Mexico and Belize.

The company said it had received a commitment for $74.3 million of debtor-in-possession DIP.L financing from Delta that would help it to carry out normal operations.

"The only reason for their existence going forward appears to be their deal with Delta," said Ray Neidl, an airline analyst at Maxim Group.

UNECONOMICAL

Neidl said the pressure on regional airline companies like Pinnacle and Skywest Inc (SKYW.O) has been growing in recent years as high fuel costs cause major airlines to cut service to the smaller cities they serve with their regional partners.

As major airlines focus on larger cities, they require bigger airplanes, further marginalizing their regional partners, which fly smaller planes, he said.

"With high fuel costs, it's much more uneconomical now to use the regionals into smaller cities and use smaller jets. That's why regional airlines are generally moving up in size in the aircraft they operate," Neidl said.

"The regional sector is shrinking and moving toward larger aircraft in general, and the number of participants is going to be declining," he added.

In its bankruptcy filing, Pinnacle described its business model as a "race to the bottom" where regional airlines are forced to bid lower and lower for the business of major carriers.

The airline's contract with US Airways was already ending, and a spokesman for that airline said the bankruptcy has no effect on operations. A spokesman for United said it would gradually move the United Express flying now done by Pinnacle's Colgan to other carriers.

The company said it would seek wage reductions and other concessions from labor unions and that it hopes that consensual agreements can be reached with the unions.

In November, AMR Corp (AAMRQ.PK), the parent of American Airlines, filed for bankruptcy and immediately flew into trouble with unions over negotiation of labor contracts.

In March, AMR sought bankruptcy court approval to throw out labor contracts, a move that puts new pressure on pilots, flight attendants and other unionized workers to agree quickly to concessions.

Pinnacle had listed estimated assets and liabilities above $1 billion, according to a court filing.

Shares of Pinnacle were down 55 percent at 60.5 cents on the Nasdaq on Monday morning. Typically, shares of bankrupt companies are wiped out at the end of the bankruptcy process and new shares are issued.

The case is Pinnacle Airlines Corp, Case No. 12-11343, U.S. Bankruptcy Court, Southern District of New York.

(Reporting by Kyle Peterson in Chicago and Sakthi Prasad in Bangalore; additional reporting by Karen Jacobs in Atlanta and John Crawley in Washington; Editing by Michael Perry, Jeremy Laurence and Matthew Lewis)

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